I'm also European, but buying furniture on credit is perfectly normal in my country - indeed, it would be quite unusual to buy any big-ticket item and not be offered credit terms, usually with an interest-free option.
I'm also a human being from planet earth, and if I'm ok with paying X in cash to buy something, and the other persons offers me paying it in interest-free rates, it would be stupid for me not to.
Worst case, I move the cash to a 2% interest rate bank account and let it sit there. Best case, there are other investments I can make now with that capital, and end up paying less overall for whatever I was buying because having the money has made me money in some other way. Lucky case, the company bankrupts and I don't end up having to completely pay for the thing at all.
Being also European, it is rare to be offered interest-free financing, and when you are, is because you are already paying a premium and could find the stuff cheaper somewhere else. But occasionally, some shops do have the cheapest price and still offer interest-free rates. I always take it, and have no idea why I wouldn't do that.
> if I'm ok with paying X in cash to buy something, and the other persons offers me paying it in interest-free rates, it would be stupid for me not to.
Disagree. This severely complicates my economy.
Instead just having X funds less available, I still have the same funds at disposal, but have to remember I owe X to Y which must be paid by Z.
Even just once this makes the simple question “How much disposable funds do I have?” hard to answer.
More than once and I will need a system to manage my own personal economy. That’s horrible!
When asked for credit I always answer no, because the small savings of delayed payment does in no way make up for the extreme complexity it adds to day-to-day economics.
What I do has worked great for >10 years:
- Direct deposit paycheck into checking account 1(the main account)
- automatically transfer spending money to checking account 2 (I call it the Petty Cash account)
- auto transfer $x for the large recurring or known but infrequent bills into savings account 3 (I call it the Escrow account)
- Only issue bill payments from the main account
- Only walk around with debit card for petty cash account. I also use this for online purchases, Amazon etc
- As needed, transfer from escrow to main to pay off something big, like property tax or car insurance.
Play with the transfer amounts to suit your budget. This helps you not have to think about spending money, or if you have enough to pay rent that month.
Back to the furniture example from grandparent comment, I simply ensure that main has enough in it each month to cover the monthly expenses. HTH
Some online banks have virtual subaccounts, which let you 'hide' money from your main account, if that's the way you are tracking funds available.
> More than once and I will need a system to manage my own personal economy. That’s horrible!
You already have a system, and it sounds like it's 'ask the bank how much money I have'. In the not too distant past, checking accounts came with a checkbook that included a register for you to track your expenses, but I guess humanity has declined.
You're going to need a "system" to manage your finances no matter if you buy furniture on credit or not.
In fact, if you aren't buying on credit your finances are more complicated because you have to plan ahead make sure you've got future major expenses covered.
In this case they make they money with people that forget about it, or do it late and pay huge premiums.
I don't want to encourage this business model, that's why I don't do it.
No, they offer the credit to incentivize you to make the purchase right now, don't think about how to pay it now, because ... you can just pay it over a year.
And it's perfectly okay for example if you just bought a new flat and you're broke as fuck, because you spent all your cash on must-repair stuff, like getting the plumbing in order, but you also fancy a new bed, because you have none, so interest free bed it is!
Of course if you barely make enough to live month-to-month, then it's unlikely you'll be able to pay the monthly installments of the loan. (And usually you'll be declined even the in store zero-interest loan too.)
Have you seen eg. Germany's bond yields? They are negative. People love safe money parking, they don't want to take risks, manage investments, oversee companies, fiddle with product development, bet on innovation, think about market fit. So they do the next best thing, try to come up with minimal risk minimal profit financial products, and that's what these furniture/fridge/oven loans are.
Furthermore the shop pays some service fee to the loan provider, and thus they scrape by.
I'm also European and I know, within my own country, one group of people who would fin it completely normal to buy TVs and furniture on credit and another group that wouldn't. The former is low income and the latter is high income.
People in low income communities find it very normal to buy on credit, often allowing you to buy now, pay in a year. My friends from higher income communities think this is a strange thing to do.
What I'm trying to say is that some of these customs might not depend on country, but even on groups within countries.
On a related note, I've personally noticed that here in the Netherlands, there's a pretty clear split between low income and high income, very tightly connected with education. In 'High School', lower and higher education are split in different classes and often different schools. So friendships are often formed within these groups and not across them (sports begin the exception). Because of this, a lot of people think something is normal in the Netherlands, but it's actually normal in their environment.
Being offered whether actually planning to buy on credit are different things. I'm German and would never buy furniture for which I don't have the money (exception maybe if the oven breaks and I don't have enough at hand) - but I'd never buy a sofa paying as instalments.
This is absolutely the case for Germany yeah. We only take credits out for cars and houses mostly. Taking out a credit for common or ordinary items is very uncommon and looked down upon. It "shows" that the person can't handle money well or lives above their means.
Each time I've got a sofa I've done it on credit. It's always been 0% interest and it seems sensible to keep money liquid if someone wants to give me credit for free.
I had the exact same thought. Making credit easier to obtain is taken as 'good' but I only see that as beneficial for something major like a house or car but the idea of going into debt for disposable items seems really weird
Unfortunately, it’s deeply ingrained in US culture to rely too much on credit. It’s just one of many barriers that separates the wealthy from the poor.
Payday lenders don’t have limits on the amount of interest that they can charge for a given payday loan. Worse yet, loan applicants don’t have to demonstrate ability to pay the loan during the application process.
Legislation was recently passed to require payday lenders to loan only to those who could demonstrate ability to pay, but this was recently reversed after intense lobbying by the payday lenders.
Credit access is vastly predatory in the US, and feeds into our consumerist culture that believes in nice phones, watches, cars, whatever, and has created generations of debt slaves owing interest in excess of 20-30% that they’ll likely never be able to repay.
A former coworker once said to me: “those who understand compound interest earn it, and those who don’t understand compound interest pay it.” And generally, I’ve found this to be very true.
And people who can't afford to pay cash for cars should buy used cars.
Sometimes cash flow is more important than final price. I haven't experienced it myself, but I heard that this is especially true for low income people who live paycheck to paycheck. The $300 couch you can get on a credit for 24 easy payments of 30 dollars is easier to afford than the $100 used couch.
I do agree with you, since I've done it myself. I've also taken furniture friends were going to trash. But I refinished and cleaned them. However I know not everyone has those skill sets.
But, is it right to say someone can't have something moderately nice? I couldn't afford to in the past and lived like that. I didn't like it, obviously. But I also had an "exit strategy" to that situation, which has decently worked out.
I'm just curious how I'd feel if it didn't work out. Even though I agree with you, that comment kind of stung oddly... I don't know...
I haven't financed furniture but my impression is that if your credit is decent that the cost of financing it is basically the same as paying cash.
Furniture is high margin, low volume so furniture retailers have an incentive to spread out cash-flow and get consumers to buy more expensive furniture than they would if paying all at once.
That said, I suspect if your rand the numbers you'd find that the overwhelming majority of furniture (by units sold) is bought cash from Walmart, Ikea and the like by people paying cash.
Furniture can often be sold on credit or with payments, because it can be a pretty big investment (e.g. a good bed). Mind you, can be - chains like ikea offer products at a price that should be payable from savings.
But it's also pretty common for cars and houses and the like.
>it would never occur to me to buy furniture on credit
Ikea, and nearly any reasonably sized furniture store, has a financing arm. So I assume it's common (and a money maker).
Thing is, often these places offer 6 months interest free and what not, so as long as you pay off your debt in the allotted time, it's smarter than paying cash.
Those loans can be a profit center as they make it really easy to miss a payment, and then instantly jack up the rates to ~20% APR. Think short window to make a payment and no automatic payments available. It’s probably not worth it for effectively a sub 1% discount.
It's worth it until you miss a payment and run in the absurdly high interest rates. Which makes it not riskless, because your risk of missing a payment is non-zero, even if you think it is zero.
And regarding having cash: if you set aside the full amount in cash at time of purchase in order to reduce the risk of not being able to pay the rates, then you did win absolutely nothing. Opportunity cost of not having that cash available for profitable investments in case of paying in cash is what could possibly be the reason for the credit variant being cheaper in the end, but that of course depends on you investing the cash and divesting just when it is necessary to pay a rate.
It's not always worth it. If you have to spend 1 hour to set it up initially, sign the paperwork and then an extra 15mins per month paying it, it might already be very much not worth it.
The fact that these constructs exist and only make money when people make mistakes should tell you that enough people make mistakes to make it profitable. This makes it not riskless at all. It makes it predatory.
These constructs also helps people buy more expensive items than what they could afford without credit. I wouldn't jump to that conclusion just because it exists. Credit companies also take small fraction of the transaction. The store is willing to pay that fees because it increases their revenue.
If they can't afford it without credit, they can't afford it with. And vice-versa. There is no credit construction that will make this different, except if it has a negative interest rate. To me this is obvious because if they can afford the credit, they can afford to save.
Many places offer interest-free deferred payment. For example, Design Within Reach, through Synchrony Bank, lets you pay in equal installments over 24 months (or less, if you want) [1]. APR around 20% kicks in if you go past the time limit.
Would you possibly be in the top 20% household income percentile? For such households, it's generally not required to buy furniture in credit in most markets. Credit for these sortse of things generally is for people with lower income
In my country lower income people usually save money first (even if they need to save for a long time, like a year or two), then buy expensive items, like furniture.
Typically it works like this: people simply try not to spend their whole income, and save at least some part of it. Then, when they arrive at a significant amount of it they sit down and think: what can we do with those money? buy a new car? redecorate our living room? And if they decide to redecorate they buy furniture or whatever is needed with cash. Buying stuff on credit is pretty much unheard of.
